Question (CA): My husband and I are in the market mix of what some folks call "inexperienced baby boomer real estate investors." Last year at this time we took out a home equity loan on our home in San Diego. You know I'm sure what has been going on with appreciation in this beautiful city.
We first purchased a property on a golf course in Olympia Washington for 180K. Olympia was my home town a year ago. Then we decided Tucson was an even better investment so May of 2005 we bought a home for $226,000 that was built in 1945. It was somewhat of a fixer-upper, but it is a mile and a half from a college. It is charming with an R2 lot and a guest house in the back. Well one thing led to another and we ended up having to put another 25K into fixing it up.
Now our Equity line is hovering over 75K and the payments are skyrocketing. We were talked into getting the so-called "pick a payment" or negative amortization loan for the Tucson property and the payment is slowly going up on the property. We are locked in at a year before we can re-finance.
Meanwhile our home in San Diego has 3 years left on a 5 year ARM. We are renting both the Olympia and the Tucson properties through a property manager. We are breaking even on Olympia and the appreciation in that area boasted 23 percent this past year. Tucson has surpassed that with 34 percent in 2005. We are not breaking even in Tucson and are shelling out about $120.00 to maintain it and we are just making the minimum payment, which of course is putting us in the negative amortization category to the tune of about $200.00 a month.
We cannot continue much longer as far as paying this high equity loan to subsidize the properties. I am worried about leveraging our home in San Diego with an ARM that may implode in 3 years. Any advice you can give us would be greatly appreciated
Answer: First and foremost we recommend that you hire a professional in providing financial advice that will take into consideration your complete financial picture.
However, if we were to comment upon your situation as described in your email to us, we suggest that, if at all possible, you make a payment on the Tucson property that does not increase your negative amortization (i.e. full principal plus interest). At least then you might be able to slow the build-up of principal you owe until you can re-finance in a year. You might also wish to consider selling it then.
In addition you might also consider selling the Olympia, Washington home (assuming there is not a prepayment penalty that would use up most of your proceeds from a sale) to generate some usable funds to make full principal and interest payments on the AZ property.
As you pointed out in your email to us, your inexperience in real estate investing led you into the trap of having too much highly appreciating property without enough available cash to service the debt. It is a classic example of how financing got too creative! The good news is that you may have the alternative to get out now, sell the Tucson property in a year and keep your San Diego home.
Question (CA): I have two investment homes in Texas. I purchased these properties with my brother and sister about 6 months ago as investment homes. Since then the loans have been sold off to a new company. We just recently switched title to a family trust. In doing so the company with our loan sent us a letter saying we have violated our mortgage and they are going to accelerate the loan. This is due to it being a non-owner occupied home in a Family Trust. How can they accelerate the loan if there is no fraud involved? Is there some kind of Texas law against non-owner occupied property owned under a family trust?
Answer: To our knowledge there is no Texas Statute prohibiting a non-owner occupied property from being sold to or otherwise conveyed to a family trust. There are laws -- both federal and state, against telling a lender that a property will be owner-occupied when in truth it will not be owner-occupied and that can be classified as mortgage fraud because of the misstatement of facts to the lender.
When you and your brother and sister purchased the homes, did the lender involved know up-front that these were "investment properties?" In other words, did you three enjoy better rates and/or terms in the loan documents because the lender involved believed they were going to be "owner occupied?"
There also might have been a fraud perpetrated against the lender if the family trust documents prohibited any investment or non-owner occupied properties.
But what most likely happened when the loans were "sold" to the family trust, a lender violation occurred if the sale took place without your lender's knowledge. If that happened, then there would have been a Deed of Trust violation that would have caused the lender to accelerate the loan. In our opinion that is probably the most likely reason as the Deed of Trust requires it via the "Due on Sale" clause.
We suggest you hire an attorney experienced in sorting out this type of violation and that you three follow this attorney's advice.
Question (GA): I periodically do Mortgage Industry training classes in Texas. I want to know if Texas has a standard sales contract for all real estate transactions. Georgia, for example, does not have a standard contract, but allows any form as long as it has the parties involved, terms of the contract, notarized, etc.
Answer: Texas does have a standard contract for all residential sales transactions with exceptions granted to the parties or their attorneys in the transaction. The Texas Real Estate Commission lists the "promulgated" forms as well as other informative documents, FAQs, etc.
Question (CA): [Note: The reader asked this question in early November 2005.] My husband and I refinanced last April 2004 with a 5/1 ARM Libor at a rate of 4.25 percent. Our home has doubled in value and we are thinking about moving to Orange County, CA, but are uncertain because of the rise of interest rates. However, we must do something in the next 3.5 years since our 5/1 ARM expires at that time. Would you recommend we sit tight for the next 3 years or sell now since rates are still considerably low? We don't know what to do!
[We replied at that time:] Why are you "thinking" about moving to Orange County? Is it a job transfer, shorter commute, or some other reason? The reason we ask, is that if you intend to move anyway -- interest rates aside, then how long do you intend to live in Orange County? A 5/1 LIBOR rate of 4.25 is an excellent rate. All other things being equal (i.e. the move to Orange County is just in the "thinking" or "considering" stage and is not a required move) we would recommend sitting on it. However, if you intend to reside in Orange County for an extended period of time, we suggest you consider moving now to take advantage of the still relatively low interest rates.
[This reader has written us with the following:] We're still in the "thinking" stage. I'd like to take the plunge but my husband is hesitant and doesn't think a 30 year old home is worth $650-$700K. The market is too volatile for him. Plus we'd be downsizing. (We are a family of 5) However, the reasons to move are justifiable:
- Commute -- both of us work in Orange County (1 hr to/from work for both of us daily);
- Day Care -- children are watched in Orange County by my mom;
- School -- children go to school in Orange County; and,
- Residence -- we will reside permanently in Orange County.
Now, interest rates have gone up since I wrote you in November. Considering the above, will you now strongly suggest we take the plunge or hold off until our 5/1 Libor ends in 2009 and take our chances with the market and interest rates then?
Answer: Yours and your husband's is not a business or financial decision. It is a lifestyle and personal preferences decision that you both face.
Granted, you spend a lot of time commuting to and from work (I'm assuming you each spend an hour driving to and an hour driving home from work, or 2 hours each driver each way for a total of 4 driver-hours), plus your primary living activities appear to be focused around Orange County. You should communicate openly and honestly as to what about your existing lifestyle you like and dislike. A list of "pros and cons" will sometimes shed light onto a seemingly convoluted question or an issue that has two equal but opposing sides. There is no question that your interest rate is a plus feature of your current home, but at what lifestyle cost? Are you spending so much time commuting and preparing for the commute that you have no time to spend with each other and with your children?
From personal experience, if you can afford it, move. The time factor alone in your car, plus the expense of vehicle operation, takes away valuable time from your daily life, and costs more than you think. You are probably not in as good of a mood when you get home, either, after fighting traffic for an hour (or anticipating it when you leave in the morning). You're also closer to your support group (family), which really has an immeasurable value. The lowering of the "hassle" factor also shows up in your daily demeanor. You tend to be happier. The only downside is the expense, and if that is unbearable, don't do it.
We have been quoted when commenting upon the primary job of a real estate licensee, that it is to deliver what the consumer of real estate services wants and needs at a price and upon terms the consumer is willing and able to pay. It is focusing upon what is wanted and needed that is the pivotal point involved in resolving your question.
